Yellen in the firing line as Trump's comments draw relevance

With just under a year left in her first tenure as Chair of the Federal Reserve, Janet Yellen has been forced to defend the central bank's actions subsequent to the onset of the Financial Crisis as well as field questions about a possible imbalance in over utilising monetary policy in an effort to substitute the shortcomings of the Obama administration's lack of an appropriate economic strategy that failed to produce the necessary growth needed.

Testimony given during Yellen's appearance before the Senate's Banking Committee reveal an intolerable tone setting in as indications begin to emerge on how Republicans are expected to deal with newly incumbent US president's views that the Dodd-Frank Act on financial reforms are stunting the growth of the economy by shutting out small to medium enterprises from raising loans.

Besides this, President Trump has also been noted as saying that the appointment of Janet Yellen was "highly political" and the Federal Reserve was being used to mask the failings of the previous administration. He went on to stress the importance of political independence in the monetary body.

These comments were made while Trump was the Republican presidential nominee.  

Fed’s Yellen spars with legislators on regulation, economy https://t.co/7eD0Rznz6h pic.twitter.com/3lH6Ih1n4O

— Business Day (@BDliveSA) February 16, 2017

Yellen isn't going to find much refuge in the year ahead and will ultimately be pressured to defend the actions of the Fed in the attempt to save its credibility amongst the financial sector.

However there is an argument that's been growing with intensity with every passing year over the sedative response central banks across the globe have taken in normalising the interest rate cycle.

In some cases central banks, like the ECB and BOJ, have taken the decision to continue using easing measures without much success while causing concern with investors over the length of continuity with such programs and it's ability to deliver on it's promises of prospects.

The Fed doesn't have too much pressure in this respect as it's the only major economy to have begun the process of interest rate normalisation, however with that being said, it might very well press Yellen to aggressively lift rates if she's to have any chance of keeping her job ... a fate that still hangs in the balance.  

The Fed is being pushed into finding scope with negative interest rates

The search for yield in the current market environment has become an ever increasing theme that's gaining momentum from global central banks persistent decision to drastically rely upon the effects of fictitious money creation to kickstart the world economy. The unabating actions of these institutions has meant markets around the globe face the difficulty of finding decent returns and the prospects of being flooded by a wave of excess liquidity created in a monetary stimulating frenzy.

As the flow of money supply entering the global financial system eclipses the actual demand for it, investors are swept into seeking out riskier investments than usually accepted placing them with a grave dilemma to contend against. Either ignore the consequences of the risk or face having your money stagnate and in some cases drawn down when participating in negative interest rate deposits.  

ICYMI! The global high yield #spread has tightened by over 300(!) basis points since February this year. pic.twitter.com/EKTDjIzKhv

— jeroen blokland (@jsblokland) August 24, 2016

Debate has raged over whether Federal Reserve chair Janet Yellen, set to speak at the annual Economic Policy Symposium tomorrow in Jackson Hole Wyoming, will clear up any uncertainty regarding the bank's once ambitious belief of progressive hikes in the interest rate which has been halted by the emergence of economic distress outside its borders.

However as much as Fed officials try desperately to throw smokescreens in front of market participants by speaking of minatory prospects of interest rate hikes, markets aren't taking the bait and continue to drive developed nations yields further into negative territory.

The Fed realises that should it pursue further interest rate increases the gains obtained from those seeking out yield could ultimately gravitate into financial catastrophe leading many to believe the might of this trend will eventually forced the Fed to conform to the existing inclination on the part of other central banks such as Bank of Japan and the European Central Bank in feeding the market's mammoth appetite for stimulus and thus dismantling the possibility of normalisation in interest rates.  

The US Federal Reserve's indecision making markets nervous

Market participants were scarcely off their recent rebounded confidence at the start of the week heading into a crucial week for the US Federal Reserve whose annual Economic Policy Symposium to be hosted in Jackson Hole, Wyoming from the 25-27th August evolving into an uncertain distraction away from the focus on buoyancy driving markets higher.  

The annual symposium sees Fed officials from around the United States gathering in one place to discuss economic circumstances the country is absorbing as a result of monetary policy implemented throughout the year. This year's theme: Designing Resilient Monetary Policy Frameworks for the Future giving a good idea what might be on many officials minds.

Last week we saw the Fed release the FOMC minutes of the meeting that happened in July which highlighted a deep divide amongst members in deciding whether the US economy was strong enough to sustain an interest rate hike. Some prominent regional members such as William Dudley, president of the New York Federal Reserve expressed his view that the central bank couldn't wait much longer to implement the second round of rate hikes whilst relaying a tone that set the scene for an imminent increase expected in September.

Needless to say his thoughts weren't shared amongst all decision makers with half the participants opting for a stay of execution in favour of  more evidence from economic data regarding the strength of the economy.

Yellen’s speech at Jackson Hole set to dominate mood on Wall Street https://t.co/zyTWExtoO2 pic.twitter.com/ej5XYOfeys

— Yahoo Finance (@YahooFinance) August 22, 2016

I wrote an article about this dilemma the Fed had found itself in saying the split in opinion was creating uncertainty in markets which would be met with trepidation. I went further on to discuss two possible scenarios that could happen depending on the type of action the Fed decided to take saying it was likely for them to buckle under the pressure of global policy alignment that's become the norm over the past few decades and follow its developed nation peers in pushing for softer monetary conditions from a low base.

Yesterday we heard another prominent figure, vice chairman of the Federal Reserve Stanley Fischer reiterating Dudley's comments on the strength of the economy and necessity of an interest rate hike. He said the Fed's target's were close to being met on most economic indicators with positive remarks about employment but recognising the economy has done "less well"than hope for.

It's getting down to crunch time for the Federal Reserve to choose the direction of its course with both outcomes having major impacts in the long term scheme of things.

The Fed's integrity may have suffered in the months gone by since implementing the first interest rate hike in December while over confidently saying it expected to hike rates four times in 2016, a statement I had said showed the miscalculation of an influential policymaker.

This possibly provides an explanation why some FOMC members have come out strongly with the intention to hike conscientiously knowing how important integrity remains in building trust with the public in the decision it takes. The absence of such virtue evades policymakers from any conviction on the part of participants in finding relief in future intervention measures and thus a failure in its effectiveness.  

Focus turns to central bankers to qualm uncertainty

Markets have been edgy this week with much of the movement stemming from currency pairs as developed world's central banks and economies took centre stage as risk begins to build up. Most notably was the Japanese Yen's remarkable appreciation against all of its major peers with the government attempting qualm bullish optimism by saying it was ready to intervene in the market at any given time.

The abrupt appreciation of the Yen flies in the face of policymakers at the Bank of Japan who have tried but failed in their attempts to depreciate the currency with extremist monetary policy that's seemingly had an inverse impact.

We also saw shakiness in the Euro as a number of issues take strain on the economic bloc. The ECB came out reassuring the market of it's willingness to up its ante if the stimulus measure currently in place failed to produce the desired outcome market participants had been expecting.

Apart from the monetary woes weighing heavily on the Eurozone, political scandals are not afar with leaked transcripts of conversation between IMF officials providing impetus to believe that negotiations surrounding a renewed bail out deal with Greece and the Troika is set to display the same indecisiveness produced at the beginning of last year.

Notwithstanding this, the worry that the Brexit referendum vote will need more convincing than once thought adding further complexity to matter within the region with the date of both aforementioned issues falling within a tight schedule that wouldn't allow policymakers to give enough attention to each.

It was the turn of Fed Chair Janet Yellen to face the scrutiny of the market's nervousness after she sat on a panel with former Federal Reserve Chairman Paul Volcker, Alan Greenspan and Ben Bernanke discussing the state of the US economy as well as the direction of monetary policy around the globe. Yellen said she did not believe that the US economy had formed a bubble and there were no risks of a burst either. This after presidential candidate Donald Trump made remarks that the US economy could be on the brink of implosion at anytime.

Evidence is pointing to the market becoming unsettled and the lack of response to central bankers dovish tones  is spelling danger for the weeks that lie ahead. The focal point around major central bankers of the world happens as the backdrop of political uncertainty takes hold of fears however this time the once turned to financial superheroes of yesteryear are tripping up over their own powers to save the world economy from it's inevitable fate.

It's been a rocky week for the $5.3 trillion-a-day forex market https://t.co/Uz3hFWDqG4 pic.twitter.com/N23tksqJ3I

— Bloomberg (@business) April 8, 2016

Discussing it earlier this week in Travelling Technicals I had said that the New Zealand NZX 50 Index looked to be the best looking technical chart I've done analysis on so far this year and it proved the best performing index this year amongst its developed market peers.

The reasoning could lie in the fact that New Zealand's economy operates with a wide exposure to agricultural production which probably gives a clue to the performance. In the article below its said that the lack of foreign investment and defensive stock all played its part in helping lift the index. If this were the case it could possibly be one of the first indications that investors are starting to channel their capital towards defensive plays as they expecting a world recession.

New Zealand is a rare case of a developed market that's posting gains this year https://t.co/JDp7BT4ixs pic.twitter.com/Gv1Jm42Xwh

— Bloomberg (@business) April 8, 2016

Yellen's dovish comments spells over optimism to hike rates by Fed officials

You would think that the hype built around the anticipated interest rate hike the market had been expecting from the Federal Reserve in almost ten years that consequently caused the US Dollar to strengthen way beyond thought would've provided certainty to markets but instead has brought on more worry and concerned that's fuelled the flames of unpredictability.

This after Fed Chair Janet Yellen spoke at the Economic Club of New York yesterday during a speech striking a more dovish tone than most had expected.

The problematic situation the Fed finds itself in at present falls squarely on the fact that it had delayed the process of the inevitable interest rate hike and fallen into the trap of leaving it too late by implementing constrained policy in times of great distress throughout the world. Things become worse when you look over the oceans to neighbours Europe and Japan who both initiated negative interest rates due to unresponsive economic activity.

Divergence between policy direction amongst developed economies suggests a decoupling of a common agenda to drive world growth in harmonious tandem. The Fed has committed itself to the normalisation process whereas other central bankers have opted to continuing pushing the extremes of monetary policy stimulus. This effectively deems the Fed's current stance void of any chance at succeeding as alignment has become a frequent feature in deciphering the types of measures used to revive or pull brakes an economy.

Janet Yellen's comments that the Fed is looking to "gradually"lift rates to a reasonable pace are signs that the decisiveness that once stood firm at the central bank is beginning to shake with doubtfulness over whether the current view of tightening policy is the correct decision and perhaps an indication that the over optimistic nature of FOMC members may have created expectation that the US economy could fend off more than one interest rate hike.

However its a double edge sword because the more the Fed holds off on hiking rates the more concerned the market gets as the bleakness simply reaffirms the calamitous outlook many are believing to occur.

Yellen's super dovishness creates confusion https://t.co/EC855KAhaT pic.twitter.com/sehG11jN9V

— CNBC International (@CNBCi) March 30, 2016

In fairness to Miss Yellen, the normalisation process cannot be seen as an ordinary event that takes place during the normal course of economic activity. The situation the world's found itself in is not ordinary and the measures applied so far highlight the extent policymakers have gone too to prevent the worse financial devastation since the Great Depression.

My greatest fear at the moment is it may be too late in the game for radical policy shifts from world governments that have been called for from many corners of the economy and as a result of the inaction a new economic catastrophe may emerge. If this were to happen there would be considerable less room for governments to fix the problem and even less leverage from exhaustive monetary policies.

This allows for very little maneuvering space to be flexible and would force politicians to finally confront the structural issues their economies having been facing for a number of years that keep getting delayed due to unpopularity amongst ordinary citizens. The unfortunate truth is you cannot reap the benefits of the system for which you haven't laid an ounce of work towards and the reality is going to come down particularly hard on those who have found commonplace in these conditions.

Observing the rhetoric from key figure in the central bank world would suggest that the tone once used to bring excitement back into the mixed is starting to wear thin with critical examples of that coming from the ECB and BOJ. Added stimulus measures have yet to drive markets forward with the latest statement by Yellen being the bone of contention between those who believe monetary policy still has the ability to add kick to the economy and those who believe the clock is ticking towards the next economic implosion.

Whether the latter or the former proves true will form the importance of our assessment of markets over the next month with much attention needed to be pointed in the direction of riskier assets and their ability to produce returns they've failed to generate thus far this year.

Fed expected to keep rates on hold as tone closely watched

There's been a level of mutedness that has lay around global markets awaiting the Federal Reserve's decision on interest rates with expectations that hiking will be held off during this FOMC meeting after its European counterparts, the ECB spooked markets last week by painting a bleak economic outlook that could see deeper negative territory for interest rates in that region.

We heard yesterday that the Bank of Japan voted to keep measures in place fearing that any deviation might trigger a global selloff on the back of desperate actions needed to be taken by central bankers to save their respective economies from distress.

Today's Fed announcement doesn't possess speculation over whether there will be a rate increase or not but rather the pace being set. FOMC members expected to initiate four rate hikes during 2016 which many had thought to be an optimistic number that has subsequently proven true as world markets are being faced with tougher economic climates and little leeway allowing policymakers to maneuver.

I've said over the last few days that I expect the market to be tuned in to the tone Yellen strikes when it comes to the issue of negative interest rates. So far we've seen adverse reactions to what policymakers believed would spur markets on but failed to ignite the passion to drive optimism higher. These moves are leaving central bankers confused over whether to continue exploring the effects of negative interest policy or perhaps start seeking support from their fiscal partners in crime...governments.

Nonetheless we are moving closer to what I believe to be the edge of a cliff in terms of market valuations and I don't envision seeing much more support for the current bull run that recently celebrated its 7th year of existence. Unless the true facts are placed in front of the markets eyes instead of constantly being distracted away with artificial monetary stimulus that seemingly helps fade away the responsibilities by those elected to manage economic affairs in the interest of its people.

More hikes may be coming... your guide to Fed decision day https://t.co/LyydTaQ8Z0 pic.twitter.com/mQmUpst7co

— Bloomberg Business (@business) March 16, 2016

This chart of the Dollar Index provided by Jeroen Blokland puts things into context really well. Up until the Fed has implemented an interest rate hike of 25 basis points, nothing stood in the way of upside momentum in Dollar strength. Fast forward three months after the rate has had time to work itself through the system and the Dollar is trapped in a consolidatory price range that refuses to budge.

The irony of it all is it took one rate hike of 25 basis points to halt its march upwards, hardly the kind of penetrative action expected to place a drag on the economy. One would've expected a series of hikes before any kind of headwinds begin to be felt. This highlights the fragility of the US ecconomy is dealing with that just can't kickstart the growth engine so many have hoped would've eased up on the hard landing experienced by China.

#USD strength is now a far less(!) compelling reason for the #Fed to postpone rate hikes. $DXY pic.twitter.com/3fwYHnBn1K

— jeroen blokland (@jsblokland) March 16, 2016